Macroeconomics is the study of economic behaviour on a large scale, rather than at the atomistic, individualistic or firm level, such as is the case in microeconomics. Macroeconomic analysis determines the relationships and characteristics of an economy on the sectoral, national, international and global scale. This is done through the study of macroeconomic indicators such as Gross Domestic Product (GDP), the Consumer Price Index (CPI), the Balance of Payments (BOP), the unemployment rate, bank credit, and interest rates among others. By applying economic principles and econometric techniques to these variables and data collected about them, economists can draw inferences as to their relationship with each other or with other factors depending on the client’s needs and the availability of data.
Macroeconomic analysis is utilised by policy makers, governments, and central banks to formulate and rationalise, among other things, regulatory, fiscal, and monetary policy. Different non-governmental organisations also make use of macroeconomic analysis to conduct independent economic research and forecasts that allow them to get a grasp of a specific industry or economy, or specific aspects thereof. Macroeconomic analysis is in fact usually applied to study individual characteristics of an economy such as its economic output growth, labour markets, property markets, inflation, consumption and saving, and investment. The economics team at Equinox Advisory has helped both public and private sector clients carry out independent research using macroeconomic techniques. The collective experience gained over years of macroeconomic modelling and analysis has given our economics team a unique skillset that allows them to address empirical macroeconomic issues while taking into consideration the inextricable social, political and life sciences relationships that are relevant in the specific analytical context backed by the latest cutting-edge theoretical and evidentiary bases.
Macro- Economic Impact Assessments (EIAs) are used to determine the impact of a project or a policy on the different political and socio-economic aspects of and groups in an economy. Although at times EIAs have a microeconomic foundation (as discussed here), they can also be applied directly to a macroeconomic context. Both micro and macro-level EIAs are useful for decision-making and decision-support services. However, as the perspective from which they are undertaken is usually different, they may have different final results. In fact, whereas microeconomic EIAs will look at factors such as pecuniary costs, price setting and revenues, macroeconomic EIAs will look at alternative factors such as social costs, externalities, non-pecuniary benefits and the advantages and disadvantages to an entire economy. By way of example, EIA under its macroeconomic form can be used to determine the impact of an education or health project or programme on GDP and the growth path of an economy.
Macroeconomic models are useful insofar as they provide an explanation of how an overall economy works at the aggregate level as well as how national economies interact with other national economies and what the impacts of such interactions are. Through the use of simulation models, the key relationships within an economy are first econometrically estimated and then made use of to produce predictions or inferences. Macroeconomic models provide governments, policy makers, firms and individuals consumers with an explanation and an understanding of the macroeconomic features of an issue that needs to be understood
Macroeconomic models can cover a wide range of topics and issues ranging from the dynamics of a labour market, interest rate behaviour, commodity prices and equity valuations, business investment spending in an economy, and consumer behaviour in relation to the savings rate. Macroeconometric models can shed light on how an economy functions both at one point in time and over time. At the same time, it can provide an explanation of how different macroeconomic key performance indicators are likely to change given changes in other macroeconomic variables both instantaneously and over time.
Some macroeconomic models contain a considerable number of variables, whereas others contain but a few. Invariably, however, macroeconomic impact assessments relate the variables used in such a way as to ensure that the combination of these variables provides results that, when interpreted, can provide useful information to the analyst, irrespectively of whether the macroeconomic impact assessment is being undertaken to understand what repercussions a change in a variable outside of the sphere of control of the analyst might have or whether it is being undertaken to make a decision as to how to influence the variables under someone’s control with a view to bringing about a desired change in (an)other macroeconomic variable(s). Models also allow for the simulation of alternative scenarios which give the researcher an understanding of what might happen under different states of the world (such as different oil prices or changes in government debt). As these scenarios allow the client to explore the potential effects of changes in the macroeconomic environment, they are extremely useful in the context of macroeconomic impact assessments as they lend themselves very easily to linear and dynamic programming that can maximise or minimise an objective function subject to constraints, once inter- and intra- variable relationships are established.
EIAs are used to determine the political, social and economic effects of an action on either an entire economy or specific sectors or aspects thereof. In most cases, the social effect of a project can be determined by its Economic Net Present Value, which includes externalities like social costs and benefits. The bigger and the more encompassing the scope of a project or programme, the more likely it is to have a macroeconomic effect. EIAs will capture and attempt to quantify this impact as accurately as possible. EIAs are, on that showing, commonly required before a project or a change in policy is carried out. Cost-Benefit-Analyses (CBAs) usually encompass EIAs as they have to identify all impacts in order to come up with the Key Performance Indicators that will then be used to rank the alternative forms of the project intervention being considered. The result of an EIA should lead to a better understanding of what should be expected from a specific policy or action. EIAs must sometimes follow specific guidelines depending on why they are being undertaken. If the EIA is being undertaken for anything related to the European Commission, for instance, such EIAs need to comply with the Commission Guidelines for EIAs issued under the aegis of the Better Regulation Initiative.
Overall, EIAs will attempt to predict the isolated and joint effects of proposed actions on a set of variables of interest under different ‘states of the world’. An EIA can be applied equally effectively to a very small geographical study area such as a town or a city, as much as to a relatively larger study area such as a country or the entire world. It obviously stands to reason that the more extensive the EIA is in terms of geographical scope and outreach, the more complex the analysis required. Impacts can include direct impacts, indirect impacts, and induced impacts.
The team at Equinox Advisory can help you with your macro-level economic impact assessments by:
- Analysing the impact of regulatory, fiscal, policy, project or programme actions on an industry or economy of interest and with respect to the variables of interest;
- Analysing macroeconomic impacts for proposed policies in line with the European Commission’s Guidelines for EIA;
- Using macroeconometric techniques to develop models that determine the relationship between the variables of interest for the EIA;
- Creating bespoke macroeconomic and forecast models;
- Assisting with public EIA consultation processes to ensure wide representation of stakeholders;
- Providing economics-based public policy advice to policy makers, national authorities, governments and international standards authorities and institutes; and
- Carrying out EIAs to understand the impact of a project on the economy or as a prerequisite for CBAs in order to apply for external project funding.